H&R Block loses banking partner

Tuesday

Dec 28, 2010 at 12:01 AMDec 28, 2010 at 12:22 PM

NEW YORK (AP) — Millions of H&R Block Inc. customers who relied on short-term loans backed by their expected tax refunds will not have that option this year, since Block’s banking partner was forced by federal regulators to stop offering the loans.

It’s a blow to Block, the nation’s largest tax preparation company, which could lose tax customers to competitors still offering the loans and has virtually no time to find a new funding partner before tax season starts in January.

That means Block could lose millions of dollars in revenue. About 17 percent of its customers used a refund anticipation loan in the 2010 tax season. Related revenue topped $146 million, or about 4 percent of annual revenue.

RALs, often referred to as “rapid refunds,” are short-term loans backed by an expected federal income tax refund. A refund anticipation “check” is actually an account where a refund is deposited. This enables taxpayers to have their tax return preparation fees deducted from their refund rather than paying up front. Both products are typically used by low-income customers who file their taxes early in the season.

Block’s contract with HSBC Bank to back its RALs dates to 2005, but bank regulators ordered HSBC to stop funding the high interest loans, which typically are offered to customers with spotty or no credit histories. A spokesman for the federal Office of Comptroller of the Currency, the Treasury Department agency that regulates national banks, would not provide any explanation for the directive.

It is likely that a change in policy this summer by the Internal Revenue Service contributed to the OCC’s decision. The IRS eliminated a code that let tax preparers know if customers will get their entire refund, or if some will be held to cover things such as unpaid back taxes. Tax prep companies used the code as a form of credit check for the loans.

The policy change prompted HSBC to try to pull out of the contract with Block, which resulted in the tax preparer filing a lawsuit. Block said in a statement released Friday that negotiations related to the suit had led to an agreement calling for HSBC to fund the loans for the 2011 tax season with Block covering any defaults. That deal was blocked by the OCC action.

Block said the proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, potentially a big issue for regulators.

“As a result of the OCC’s decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher?priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general,” Block CEO Alan Bennett said in a statement. “While we are very disappointed by this decision, we have been preparing for the loss of RALs, so we have several other financial products available and under development for this tax season.” He said while the company is working to provide other options, the OCC action makes it difficult to put alternative products in place at all locations in time for the early part of the 2011 tax season.